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This quarter, we focus on some suggested ”to-do” items for asset allocators in response to the potentially reflationary impact of the COVID-19 vaccines and fiscal policy stimulus. We also highlight what we think are the most important market dynamics that allocators should keep a close eye on going forward.
A flurry of positive change
Global conditions have changed so quickly that it’s important to remind ourselves that, as late as November 2020, allocators faced: i) a global economy locked down under significant mobility constraints, with seemingly no end in sight; ii) an accelerated COVID vaccine development process with no meaningful results to show; and iii) a potentially disputed US presidential election that put further US fiscal stimulus in doubt.
Those conditions resulted in global bond yields remaining near historic lows, while many investors sought refuge in either structural sector-specific themes (such as technology and health care) or in pockets of growth and potentially higher investment returns (such as growth-oriented stocks and more speculative technology companies). Fast forward a quarter and, thanks to two major positive events during the intervening months, the world is now rapidly “reflating.”
The first such event was the US election, which not only produced a more certain outcome than expected, but also led to a US political setup more open to significant further fiscal spending (albeit of the ”borrow-and-spend” and not the ”tax-and-spend” variety). Secondly, the COVID vaccine results, released in November and December 2020, surprised on the upside with their high degree of efficacy and subsequent swift approval and rollout.
The upshot is that allocators are now facing a radically different economic outlook than they were in the fourth quarter of 2020, with 2021 growth widely expected to be…
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